Federal reserve bank says Bitcoin futures launch led to price decline

On Monday, the Federal Reserve Bank of San Francisco published an Economic Letter which concluded that the launch of Bitcoin futures trading led to the price decline of bitcoin last December.

A futures market means that people trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.

The authors of the Letter–including three researchers from the Federal Reserve Bank of San Francisco as well as a finance professor from Stanford University–think that the launch of bitcoin futures “allowed pessimists to enter the market, which contributed to the reversal of the bitcoin price dynamics.”

They believe that bitcoin’s recent price fluctuations are a direct consequence of the futures trading, “The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence. Rather, it is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.”

They also noted that Bitcoin’s behaviour is somewhat similar to the housing bubble developed in the US during the 2000s.

It has been suggested that the mortgage boom was driven by financial innovations in securitization and groupings of bonds that attracted optimistic investors; the subsequent bust was driven by the creation of instruments that allowed pessimistic investors to bet against the housing market.

Similarly, the advent of blockchain introduced a new financial instrument, Bitcoin, which optimistic investors bid up, until the futures market allowed pessimists to bet against Bitcoin.